I know, the title is a bit lame, but here for free and worth every cent of its price is my latest analysis of all things financial.
Boom (now on hold):
- Conventional wisdom a year ago was that the world was in a sustainable commodities bull market, and $4 copper was going to look cheap.
- I would argue that the most important bull market trend goes back to 1971 when the last real connections among the world currencies, the US dollar and gold were severed. The next 37 years was a boom fuelled by overlapping waves of demographics and expansionary credit
- Greed and hubris eventually, inevitably, trumped good judgment
- Greed and hubris (among politicians, financial jockeys and the general public) led to an asset bubble, notably in housing at the individual level, in credit-related derivatives at the financial jockey level and in hopelessly naive and costly policies at the political level. The unwinding of all of these is only just starting, and is being actively resisted every step of the way by people who should know better.
- Just as we think the weather should be whatever we grew up with (otherwise we label it climate change), we believe that market valuations should be in the range of whatever we have experienced in our adult lives. But for most of us, these valuations were set during the overlapping waves of demographics and easy credit described above. True historic values are lower, for instance with the S&P at 16 times earnings not at 21 times earnings.
- If earnings are heading lower, and the normal P/E is lower than we are used to, the market is still overvalued by a factor of two. This includes the market in your country, wherever you are.
- Wealth and income are related but distinct. House prices and portfolio valuations determine our wealth. Changes in wealth level affect our mood long term. But having/not having a job, or stock dividends, affects our income, which affects our mood right now.
- When house prices and employment levels both fall, a sense of gloom grows and willingness to take on new risks diminishes. Expansion becomes contraction as moods change, and the cycle intensifies through internal reinforcement.
- Governments spend more and earn less when the economy contracts. The difference is made up by borrowing (if there are willing lenders) or by debasing the currency, or both. There is more of this to come. Depend on it. Both these government actions will make you poorer. So will increased tax rates, if and when they come, and if you have anything taxable.
- In terms of every paper currency in the world, the US Dollar is the tallest midget. If you want to hold paper currency, sell your other currencies and buy the USD. But remember that in 1930 it took $21 to buy an ounce of gold, from 1933 to 1971 it cost $35 and today it costs $940. Gold hasn't got better, which leaves just one explanation for the change. And note that in terms of Euros, British Pounds, Canadian dollars, and pretty much every other major currency besides the Yen, gold is at an all time high. Got gold, or at least silver? In your personal possession?
- In terms of government help, every government is faced with declining revenues and increasing social demands, while attempting to maintain a brave face to the rest of the world so that their national currencies and banking systems, for example, do not lose the confidence of the rest of the world. Politicians do not willingly tell their voters "suck it up, buttercup, government is not going to help you". Even if they should.
- What does it mean when the value of your house is dropping, your job is at risk, your currency is being debased, your tax burden is rising and your government can not actually provide the help that you were led to expect? I think it means that having a vegetable garden and a big source of firewood is a good idea.